We've always given it away

One of the first things I learned as a novice reporter at a daily newspaper was that the quarter dropped in the newsbox – yes, it was only 25 cents in the early 1980s – and the buck-and-change collected weekly by the kids on their routes paid for the newsprint, ink and, maybe, the cost of delivery.

My salary and that of the other reporters, editors, photographers and artists – the full cost of gathering and reporting the news – came from advertising revenue.

It’s local businesses that pay for the news – not readers.

That’s the way it’s been for more than 100 years – ever since the birth of the “penny press,” when publishers discovered there was more money to be made selling readers to advertisers than news to readers.

And that’s why I’m mystified so many leaders in the newspaper industry want to start charging for news posted on the Internet.

Latest to weigh in is Al Neuharth, the 83-year-old former chairman of Gannett Co. and founder of USA Today.

“Instead of free newspapers, newspapers will begin to charge what they're worth,” he predicted in an interview – freely accessible, it’s worth noting – on Advertising Age’s web site.

Pioneering the path is Walter Hussman, the publisher of the Arkansas Democrat-Gazette, in Little Rock and two or three other papers in Arkansas, Neuharth said. “The reason I know him so well and admire him so well is that he put news in the paper and charged for it.”

Hussman forcefully argued the case for demanding readers pay for the news in a widely quoted Wall Street Journal op-ed piece last month.

“Not many years ago if someone wanted to find out what was in the newspaper they had to buy one,” Hussman wrote. “But not anymore. Now you can just go to the newspaper's Web site and get that same information for free.”

Hussman obviously has a point. Free news on the Internet certainly means some readers will cancel their print subscriptions. (Exceptions to this rule are the handful of national papers, including the New York Times and Washington Post. For these lucky few, such circulation losses are more than offset by huge increases in new readers across the nation and globe who otherwise can’t afford or don’t have access to the print editions.)

Where Hussman is off base is in assuming he can maintain his online audience after limiting his newspaper’s Web site to subscribers to the print edition or those willing to pay an equivalent amount.

The problem with that strategy is that many readers will balk at what they consider double billing. People who get their news from the Web already are paying much more for the privilege than newspaper readers pay. First they must buy a computer, then pay a monthly fee for Internet access.

These costs are the exact equivalent of a newspaper subscription in that they offset the cost of delivery and presentation of the news – but not the cost of producing the news.

The real question is whether readers will pay an additional amount for the content of the news?

Hussman doesn’t face up to that issue. Instead, he cites a dubious comparison to Ohio’s Columbus Dispatch, which stopped charging to read news on the Web in January 2006.

In the six months ending Sept. 30 of that year, the Dispatch saw a 5.8 percent drop in daily paid circulation and a 1.1 percent loss on Sunday, compared to 2005.

Over the same period, Hussman’s Arkansas Democrat-Gazette was down only about a half-percent daily and 1 percent on Sunday.

Hussman sees this as evidence of success of his business model.

I have a different read: It’s more likely Hussman has staunched the bleeding of readers only temporarily.

That said, it still may be the best strategy – albeit, a dead-end one – for most newspapers.

That’s because the alternative advertising model isn’t working for newspapers.

Hussman does the math:

“The Inland Cost and Revenue Study shows that newspapers will generate between $500 and $900 in revenue per subscriber per year. But a newspaper's Web site typically generates $5 to $10 per unique visitor per year. It may be that newspaper Web sites as an advertising medium, and free news, just can't generate the revenue to sustain a valued news operation.”

Hussman doesn’t offer an explanation why. That’s understandable because the answer is something newspaper owners don’t like to talk about. It’s the secret to their inordinately high profits: the monopoly on local daily advertising.

The reason print subscribers are so valuable is because newspapers can charge commensurately high advertising rates. Local businesses have no choice but to pay because they have no other way to reach customers so effectively.

Radio and television aren’t real threats because of a crucial fatal limitation of broadcast media: viewers and listeners must be present when the advertisement airs or the money is wasted.

In contrast, newspapers wait patiently to be read – as does the Internet.

But unlike newspapers, which require huge capital investments in buildings, presses and trucks, the Internet is open to anyone with a personal computer.

The Internet’s minuscule entry fee is why print subscribers are 100 times more valuable than their on-line counterparts. It’s basic supply and demand in a competitive marketplace. A newspaper that tries to raise its Web ad rates can be underbid by a myriad of competitors.

The key to making a bundle on the Internet is volume, volume, volume. Google charges advertisers pennies, but those pennies add up when multiplied by the hundreds of millions of users of its search engine.

But most newspapers are local by nature, their territory set by their retail markets. There’s no way even national papers, such as the New York Times, can draw those kinds of numbers.

Without those huge audiences, the revenue from on-line advertising can never replace diminishing print advertising.

And as much as publishers say they value journalism, reduced profits – or the prospect of no profits – will mean more cuts in the newsroom.

Next: W(h)ither journalism?